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Forensic audits reveal how medical aid giant was looted

South Africa's second-largest medical scheme was treated as a private cash cow by its principal officer, court papers and forensic audits suggest.

South Africa’s second-largest medical scheme was treated as a private cash cow by its principal officer, court papers and forensic audits in the possession of the Mail & Guardian suggest.

Three separate forensic investigations outline evidence of millions of rands lost by the scheme as a result of multiple abuses by Bafana Nkosi, who managed its affairs.

They include:

A Bonitas-funded property development where the project manager had millions in inflated invoices for building costs signed off by Nkosi, and then paid the deposit on a house for him;

A BEE deal which Nkosi persuaded Bonitas to invest in without revealing that he was negotiating a shareholding for himself in the company;

Cutting a former colleague in to lucrative contracts under questionable circumstances

Misleading the Bonitas board of trustees about numerous conflicts of interest

The forensic audits were attached to court papers lodged by the Registrar of Medical Schemes, who has tried to have the trustees of the Bonitas board removed, alleging that they failed to detect and act on the alleged fraud and corruption.

The registrar has since lodged an application to place Bonitas under curatorship, a move Bonitas is contesting.

Members of the board argue that some trustees did try to take action, but were stymied by board members who appeared to be protecting Nkosi and others allegedly involved.

At the heart of the case is an 800-page forensic report by investigator Cor Potgieter, who was appointed following an order of the South Gauteng High Court to look into a number of concerns that the registrar had about Bonitas’s business dealings.

That report is buttressed by forensic audits by Deloitte and Edward Nathan Sonnenbergs (ENS) Forensics, who were commissioned by the Bonitas board.

As a result of the audits, Bonitas has taken taking various forms of legal action to recover some of the funds and the police commercial crimes unit has conducted a preliminary investigation into possible charges.

Nkosi was approached for comment by the M&G on Tuesday morning. On Wednesday evening he responded that he needed more time to answer questions and threatened the newspaper with a court interdict if this was not granted.

Clansthal
Perhaps the most serious allegations relate to fraud and corruption in the management of a Bonitas-funded housing development in KwaZulu-Natal called Clansthal. Bafana Nkosi personally motivated for the company to invest in the development.

Bonitas laid a criminal complaint following an investigation by ENS Forensics which alleges that Nkosi signed off on R20-million in inflated invoices for building costs submitted by the project manager and the construction firm. The investigation uncovered evidence that the project manager, Dee Chilli, paid a R50 000 deposit on Nkosi’s behalf for a unit in the development.

In its report, ENS Forensics argues that the payment could be seen as “gratification” in terms of anti-corruption legislation.

“There is a strong suspicion of corruption” in the Clansthal development, ENS said, “which requires South African Police Service powers to investigate and resolve”.

Bonitas instituted disciplinary proceedings against Nkosi, but he resigned before they were completed.

The Cor Potgieter report goes further. It alleges that Bonitas paid R43,4-million for work worth R28-million on the project and that the construction was so poor that R4,2-million was required to make good the shoddy workmanship.

Potgieter alleges that Nkosi was responsible for getting Bonitas to invest in the development and that he insisted on Chilli’s appointment as project manager, without declaring that he and Chilli were involved in another development called Crystal Creek.

Potgieter alleges that Chilli sent 21 inflated invoices to Bonitas, which Nkosi approved for payment, even though it would have been simple for him to verify that the invoices were correct.

He also alleges that Nkosi failed to take action when the project was not delivered on time and failed to impose penalties on Chilli.

He claims that Chilli rigged the tender for the appointment of the contractor and that when the appointed quantity surveyors pointed this out, they were fired.

Potgieter alleges that Chilli lived in a unit on the development for free after failing to pay a rental agreed with Nkosi, and that the latter took no action despite the losses this brought Bonitas, as the investor.

Potgieter argues that the benefits that Chilli and Nkosi received from their involvement in the development are “indicative of a corrupt relationship and may also constitute fraud”.

Chilli declined to comment and hung up the phone.

Bonitas confirmed that the Clansthal Development is being investigated by the SAPS.

“We have been advised this week that the matter is now with the prosecutor for determination,” said Bonitas. “We are hopeful that this will result in responsible persons being charged, and at least that some of the misappropriated funds will be recovered.

“It must be mentioned that the Asset Forfeiture Unit has also expressed an interest in assisting with the matter.”

Bonitas said that the development is currently on hold.

Prescient Investment Management
According to the Potgieter report, Nkosi also sought to benefit personally by persuading Bonitas to participate in a BEE deal without revealing that he was negotiating a shareholding for himself with the same company.

This is a clear violation of corporate governance rules, as Nkosi may have hoped to increase the value of his shareholding by prevailing on a major institution to invest with him.

According to the report, Prescient approached Nkosi in August 2003 to inquire whether he was interested in becoming a BEE shareholder. Nkosi expressed interest and recommended that Bonitas also be offered the opportunity to invest.

Nkosi took up his shareholding in Prescient on April 1 2004, but only declared it to the Bonitas board of trustees on April 30 2004.

However, as early as January 30 the Bonitas board decided to invest in Prescient with no knowledge that Nkosi was conflicted.

When Bonitas officially took up its 10% shareholding on April 1 2004, Nkosi was appointed to the Prescient board to represent Bonitas, even though he was conflicted as a shareholder. Bonitas was unaware of this at the time.

Potgieter quotes from an affidavit he obtained from one of the Bonitas board members, a Mrs Hlatshwayo: “Mr Nkosi never informed me or any of the board members that he was to obtain shares in Prescient as a result of the deal,” says Hlatshwayo. “I regard this failure to disclose by Mr Nkosi as a serious breach of his fiduciary duty towards the board and to Bonitas.”

Says Potgieter in his report: “I have no problem in concluding that Mr Nkosi directly negotiated with Prescient prior to and during his negotiations with Prescient on behalf of Bonitas, and further that he only disclosed his interest in Prescient after the conclusion of the transaction.”

Prescient’s executive chairperson, Herman Steyn, said that as far as Prescient was aware, the Bonitas board of trustees knew of Nkosi’s shareholding.

Steyn said that Nkosi and Bonitas both took up their shareholding and signed the shareholder agreements on the same day.

Dr Tumi Seane
Nkosi appears to have sought further leverage for the Prescient deal, through his relationship with Dr Tumi Seane, with whom he had worked at Medscheme, Bonitas’s administrator.

Before Nkosi took up his 1% shareholding in Prescient, he offered Seane the chance to acquire 11% of his share for R99 000.

Seane accepted and a broker to Bonitas initially paid for the shares on his behalf on April 1 2004.

Seane then repaid the broker on April 5 that year.

Potgieter speculates that this was designed to prevent a direct link being discovered between Seane and Nkosi.

Prescient said that it only became aware of Nkosi’s “supposed” sale of shares to Seane during Potgieter’s investigation. “Officially this never happened,” said Steyn. “We still hold Mr Nkosi’s share certificates.

“Such a transaction would also be against our shareholders’ agreement, where he has to offer the shares to existing shareholders first. We thus became aware that there is some ‘arrangement’ between Mr Nkosi and Mr Seane, but we are not privy to its nature.”

“During this time we also became aware of the allegations against Mr Nkosi,” said Steyn. “This was an embarrassment to Prescient and we asked Mr Nkosi to resign as a director and to resign from the audit committee, which he agreed to do.”
When Seane’s employer, Medscheme, became aware of the transaction between Nkosi and Seane, Seane was immediately disciplined and dismissed on October 18 2004.

Seane subsequently took Medscheme to the Commission for Conciliation, Mediation and Arbitration (CCMA) and Nkosi defended him at his hearing.

The CCMA ruled that the conflict of interest had been substantiated, however because Medscheme had not followed a fair disciplinary and dismissal procedure it made an award to Seane.

Contacted by the M&G this week, Seane argued that there was no conflict of interest and nothing irregular about his acquisition of the shares in Prescient. However, major questions remain about his relationship with Nkosi.

On December 3 2004 Seane was appointed consultant to Bonitas and on December 23 he concluded a deal with Nkosi to become a broker.

However, Potgieter points out that Seane’s business, Seane Consulting, was authorised to act as a financial services provider only nine months later, in August 2005.

The report says that at this point, Seane had 3 199 Bonitas members on his books, which implies that he conducted business illegally for a nine-month period.

At one stage Seane Consulting had 3 803 Bonitas members. However, only 1 255 were members introduced by Seane and 1 355 “orphan members”, defined as those who were already Bonitas members without a broker servicing them.

Potgieter suggests that Seane used his friendship with Nkosi to secure the details of these “orphans” and then serviced them, which would have resulted in his earning substantial commissions.

Seane denies wrongdoing.

Potgieter also states that Nkosi misled the board by insisting that the CCMA had cleared Seane of all wrongdoing, which it had not.

“I hold the view that Mr Nkosi and Dr Seane were not frank and open with the fund about their relationship, because their interests conflicted with that of the funds,” says Potgieter.

Seane insists that he did not mislead the Bonitas board in any way.

Bonitas said this week that it is conducting an exercise to verify the appointment of brokers and how they obtain members.

“Due to the extensiveness of this exercise as well as the lack of proper records this exercise will still take some time to finalise,” said Bonitas.